Why Buy Instead of Rent?

Decades after the phrase "the American dream" was first coined, home ownership is still a meaningful goal for a large number of individuals and families. Buying a home is considered by many to be a wise investment because typically, houses increase in value over time. And, as the years go by, you can build ownership interest called equity, which you can borrow against. In contrast to renters, most homeowners receive significant tax breaks, because interest paid on a home mortgage is almost always tax deductible. Finally, there's the personal satisfaction of having a home you can call your own to share and enjoy with friends and family.

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How do I know how much I can afford?

Essentially, the amount of money you can borrow will be determined by the size of the monthly payment you can afford. As a general rule, lenders do not allow your monthly payment to exceed 40-50% of gross monthly income. With the increased use of FICO credit scoring and automated underwriting, many loan applicants benefit from more flexible debt-to-income guidelines that allow them to be approved for higher loan amounts.

Start by taking a careful look at your current assets (including income, savings, investments, IRAs, life insurance, pensions and corporate thrift plans, and equity in other real estate, etc.) and liabilities (including outstanding loans, credit card balances, etc.). Also, think about how your income-or household income, if there are two wage earners in the family-might change over the next several years. Then, call one of our experienced Loan Officers for a free evaluation.

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What does the application consist of?

The typical application is basically an outline of who you are, the property you want to buy or refinance, and your financial assets and liabilities.

What Happens Next?
You've applied for your mortgage. Now what? This simple, four-step walk through to loan closing will help you understand the procedure and give you an idea of what to expect.

1. Processing
The lender collects the information needed to process your loan and initiates a credit check. Documentation requirements vary depending on the loan program you apply for and your individual financial and credit profile. An appraisal will be ordered to determine the fair market value of the property you wish to purchase. You will have the option to lock in your interest rate or float your interest rate.

Depending upon the information from your credit report and the type of property you want to finance, you may need to provide additional documents or letters that:

What's the difference between conforming and non-conforming loans?

A conforming loan is one with an original balance of $417,000 or less for a cooperative, condominium or single-family home and slightly higher for 2-4 family homes. The conforming loan limit is adjusted annually at year-end by Fannie Mae and Freddie Mac. Conventional non-conforming or "Jumbo" loans have first mortgage loan amounts greater than the conforming loan amount. In most cases, jumbo loans have slightly higher interest rates than conforming loans.

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Are there different types of mortgages?

Yes. The two basic types of mortgages are fixed rate and adjustable rate.

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Fixed Rate Mortgages

If you're looking for a mortgage with payments that will remain unchanged over its term, or if you plan to stay in your home for a long period of time, a fixed rate mortgage is probably right for you. With a fixed rate mortgage, the interest rate you close with won't change-and your payments of principal and interest remain the same each month-until the mortgage is paid off.

The fixed rate mortgage is an extremely stable choice. You are protected from rising interest rates and it makes budgeting for the future very easy. But the interest rate for a fixed rate mortgage is considerably higher than the initial interest rate of other mortgage options. Once your rate is set, it does not change and rising or falling interest rates will not affect what you pay.

Fixed rate mortgages are typically available with terms of 10, 15, 20 and 30 years with most lenders. The advantage of a 15-year over a 30-year mortgage is that while your payments are higher, your principal balance will be paid off sooner, saving you substantial money in interest payments over the life your loan. Also, the rates are almost always lower with a 15-year loan.

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Adjustable Rate Mortgages (ARMs)

An adjustable rate mortgage is considerably different from a fixed rate mortgage. ARMs have only been around since the early 1980s. They were created to provide affordable mortgage financing in a changing economic environment.

An ARM is a mortgage where the interest rate stays constant for a period of time, then can adjust based on market rates after that time. For example, a 5-year adjustable stays fixed for five years, then begins to adjust at the beginning of year six. The initial interest rate of an ARM is lower than a fixed rate mortgage.

Most ARMs have caps-limits the lender puts on the amount that the interest rate or payment may change at each adjustment, as well as during the life of the mortgage. With an ARM, you typically have the benefit of lower initial rates. An ARM may be especially advantageous if you plan to move after a short period of time.

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What is an FHA or VA Loan?

The Federal Housing Administration (FHA) insures a wide variety of first mortgages, including fixed rate and ARM products. Down payments are low and gift funds can be used for all costs. Qualifying ratios are generally more liberal than conventional loans. However, mortgage insurance is required and the property being purchased must be owner-occupied.

The Department of Veteran's Affairs (VA) guarantees mortgage loans made to eligible veterans or reservists who are first- or second-time homebuyers. In most cases, no down payment is required. For the most part, VA-guaranteed loans are fixed rate products.

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What does my mortgage payment include?

Typically, your monthly mortgage payment is made up of four parts: principal, interest, taxes and insurance (PITI).

Principal is the amount of money you borrow. In the early stages of your mortgage term, your monthly payment includes only a small portion of your principal. As you continue to make payments through the years, a greater portion of your payment goes to reduce the principal.

Interest is the cost of borrowing money. In the early stages of your mortgage term, your monthly payment is mostly interest. As you continue to make payments through the years, a smaller portion of your payment goes to interest.

Taxes are paid by homeowners to local governments (not applicable on cooperatives), and are usually charged as a percentage of the assessed property value. Tax amounts vary depending on where you live.

Homeowner's or Hazard Insurance is a policy that protects you against financial losses on your property as a result of fire, wind, natural disasters or other "hazards." This type of insurance does not apply ot cooperatives or condominiums.

In addition, private mortgage Insurance (PMI) is required on certain loans to protect the lender against financial losses if the borrower fails to repay the loan. Usually, whenever the down payment is less than 20% of the home's purchase price, lenders require some type of insurance.

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How much will I need for the down payment?

Generally, your down payment can be anywhere from 5% to 20% of the home's value. Depending on the loan program you choose, you may be able to buy a home with a very low down payment (3% or less), or no down payment at all.

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When do I need Private Mortgage Insurance (PMI)?

If the down payment on your home is less than 20%, your lender may require that you get private mortgage insurance. This insurance insures the lender against possible default on the loan. It is not to be confused with mortgage life insurance or homeowners insurance. PMI is an ongoing payment made each month along with the principal and interest payment.

Some lenders do not require PMI. Instead, they may increase the interest rate on the loan to cover the PMI. This can represent a significant advantage to the borrower since PMI premiums are not deductible for tax purposes and mortgage interest is usually tax deductible.

Normally, PMI may be removed if you have reduced the principal amount of your loan to 80% or lower than the original purchase price. It also may be removed if you have obtained an independent appraisal stating that the outstanding principal amount of the loan is 80% or lower than the appraised value.

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What is a discount point?

When inquiring about rates, be sure to check if the quoted interest rate reflects payment of points. Many loan programs allow you to receive a discounted interest rate by paying a fee in points and/or origination fees. One point equals 1% of the loan amount, and the more points you wish to pay, the more you can discount your rate. In most cases, paying points is not a requirement; it's just an option lenders offer to accommodate the immediate or long-term monthly payment concerns of home mortgage customers.

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What is an origination fee?

Sometimes called a "point", this fee cover's the lender's administrative costs in processing the loan. Often expressed as a percentage of the loan, the fee will vary among lenders. Be sure to ask the lender if the rate quoted includes an origination fee.

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What is Prepaid Interest?

This is interim interest that accrues on the mortgage loan from the date of the closing to the beginning of the period covered by the first monthly payment. Since interest is paid in arrears, a mortgage payment made in June actually pays for interest accrued in the month of May. Because of this, if your closing date is scheduled for June 15, the first mortgage payment is due August 1. The lender will calculate an interest amount per day that is collected at the time of closing. This amount covers the interest accrued from June 15 to July 1

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What are closing costs?

Closing costs are fees charged by the lender and closing agent to process and record any new loan application and vary from state to state and county to county. These costs may include, but are not limited to, appraisal, credit report, title, prepaids, county and city taxes, recording fees and title insurance premiums. The exact costs depend on where you are buying or refinancing, the loan amount and the time of the month you close.

In some jurisdictions, an attorney represents the lender and borrower and in others, a title company represents the lender and borrower at the closing. Prior to closing, be sure to inquire if the lender requires an escrow account set up for the payment of the real estate taxes and homeowners insurance. It is important that you review what the closing costs will be with your lender and closing agents. This should take place far enough in advance of the closing to allow you time to obtain the necessary funds to pay the closing costs.

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What is an escrow account?

An escrow account is established at the time you close your condominium or home loan. This account is held by the lender for future payments as they become due of recurring items relating to the mortgaged property such as real estate taxes and insurance premiums. Lenders usually require you to pay an initial amount for each of those items to start the reserve account at the time of closing. Once your mortgage is paid in full, you are still responsible for paying taxes and hazard insurance. Escrow accounts are not required for cooperatives.

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What are lender fees?

These are fees that offset the cost of producing the loan. Different lenders may refer to them by different names, such as, processing fees, underwriting fees, document preparation fees, or commitment fees.

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What are third party fees?

Third party fees are fees that are passed on to a lender for services rendered by a third party to facilitate the loan process which are then passed on to the borrower. These fees may include, but are not limited to, appraisal, credit report, flood search, abstract or title search, title insurance, recording fees and transfer taxes.

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Will the lender agree to include my closing costs in the loan amount?

On a purchase transaction, you cannot typically finance your closing costs into the loan amount, assuming you have sufficient equity in the property. Some lenders do, however, have special programs under which you may be able to finance some, or all, of the costs by agreeing to a slightly higher interest rate. For refinance transactions, there is the option to finance the closing costs into the loan amount, assuming you have sufficient equity in the property.

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Can I close on a home without having to be at the closing table?

Some lenders will allow you to appoint someone to act on your behalf by using a Power of Attorney. In this scenario, you would actually assign a spouse or an attorney to sign on your behalf. Check with your closing agent for requirements specific to your state.

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How much money will be required at closing?

You should consult with your individual lender and closing agent; however, the amount of money needed for cash to close is comprised of your down payment, closing costs, as well as the prepaid items for your initial taxes and insurance escrow accounts (if applicable). Typically within a couple days prior to your closing, the closing agent will provide you with the final sum of money required for the closing.

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What is the APR?

To protect the public, congress decided that a more precise measure of the true cost of a mortgage loan was needed. The concept of the annual percentage rate (APR) was developed to more accurately reflect this cost factor. The APR represents not only the rate of interest charged on the loan but certain other pre-paid finance charges. These costs are expressed in terms of percent and may include, among other costs, the following: origination fees, loan discount points, private mortgage insurance premiums, and the estimated interest pro-rated from the closing date to the end of the month.

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Why is the Annual Percentage Rate (APR) on the Truth in Lending Disclosure higher than the rate shown on my mortgage note?

The APR rate reflects the cost of your mortgage loan as a yearly rate. This rate is generally higher than the rate stated on your mortgage note because the APR includes other costs, such as origination fee, loan discount points, pre-paid interest and mortgage insurance (if required). The APR allows you to compare, in addition to the interest rate, the total cost of financing your loan, among various lenders.

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What is the difference between 'locking in' an interest rate and 'floating'?

Mortgage rates can change from day to day or even from hour to hour. If you are concerned that interest rates may rise during the time your loan is being processed, you can 'lock in' the current rate for a short time, usually up to 60 days. The benefit is the security of knowing the interest rate is locked if interest rates should increase. However, if you are locked in and rates decrease, you may not necessarily get the benefit of the decrease in interest rates.

If you choose not to 'lock in' your interest rate during the processing of your loan, you may 'float', or hold off locking in until you are comfortable about the rate. The borrower takes the risk of interest rates increasing during the time from application to the time the rate is locked in. The downside is that the borrower is subject to the higher interest rates. The benefit to floating a rate is if interest rates were to decrease, you would have the option of locking into a lower rate than if you had already locked in at the higher rate.

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Is my interest rate guaranteed?

It is important to ask the lender how long they guarantee the quoted interest rate. Some lenders guarantee the rate for 20, 30, 45, 60 or 90 days. Other lenders may only agree to set a rate when the loan is approved. On occasion, lenders will not set a rate for the loan until just before closing. A longer guarantee period allows you to protect the rate for a longer length of time, which could be beneficial to you in a volatile interest rate market. Also, be sure to inquire whether longer guarantee periods are available and what additional costs may be involved.

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What is a Home Equity Loan?

The dollar difference between the market value of your home and your current mortgage balance determines your home's equity. In other words, if you sold your home this would be the cash that would be available after the sale. A home equity loan allows you to access this cash without selling your home by using your home as collateral. As you pay down your mortgage, and/or your home's value increases, your available equity increases accordingly.

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Why are Home Equity Loans and Lines of Credit so popular?

Because home equity loans and lines of credit are secured by your home, there are three distinct advantages over other types of personal loans: lower interest rates, tax deductible interest (consult your tax advisor for details) and large loan amounts. Based on your personal financial situation, you may be able to borrow up to 100% of your available home equity.

You can use a home equity loan or line of credit for almost any expense — to buy a car, consolidate debt, build an addition, remodel your home, or pay college tuition. Many people use home equity loans to pay off higher interest debt such as credit cards, auto loans, and personal loans.

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What is the difference between a Home Equity Loan and a Home Equity Line of Credit?

A home equity loan is advanced in one lump sum. You make fixed monthly payments over a fixed term and are charged interest only on the unpaid balance. A loan makes it easier to budget since your monthly payments are fixed over the life of the loan.

A home equity line of credit is a set amount of money you are approved to use whenever you like. You access your funds by writing checks. As you repay the balance, you can continue to access your credit line up to your approved credit limit. You are charged interest based on the unpaid balance. A line of credit gives you the flexibility to borrow funds when you need them. When the line of credit expires, you need to renew or pay your outstanding balance.

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